Downer EDI misses train timetable

Embattled engineering firm
Downer EDI
is set to miss an important end-of-year deadline for delivery of the first Waratah train set to the NSW government.

Confirming a report in The Australian Financial Review’s Street Talk column, Downer said yesterday it would not deliver the first of 78 train sets it is building for RailCorp until mid-January at the earliest.

The hold-up was blamed on difficulties gaining access to track to complete testing.

“Whilst discussions continue with Railcorp on track availability for December and the Christmas-New Year holiday period, it is now expected that a small number of tests will be completed in January and the first Waratah train will be presented to RailCorp for practical completion following the successful completion of those tests," Downer said.

Last month, NSW Transport Minister John Robertson indicated RailCorp would not put the train into “revenue service" until April, but Downer had still been hopeful of making the delivery in December.

Under its contract with Reliance Rail, the vehicle established to finance the Waratah project, Downer is liable for liquidated damages of $250,000 per train for every month of delay.

But Downer chief executive
Grant Fenn
said any damages incurred on the first train would be covered by the $190 million provision on the Waratah contract announced by the company in early June. The provision included $50 million for liquidated damages, of which the company is understood to have used $32 million.

Investors appeared to have largely anticipated the delay in delivery, with Downer shares falling only 1¢ to $4.30 yesterday. An analyst who asked not to be named said while the company missing the deadline was disappointing, the fact that the testing continued to go well was heartening.

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“The slippage isn’t a function of a problem with the train’s performance," he said. “So in the big picture, I think it’s unlikely that we’ll see further provisions required."

Downer reiterated yesterday that the delay with the first train was not expected to materially impact the schedule for the remaining 77 sets, including five that are due for delivery in June.

The contract to build and maintain the trains is among the largest taken on by the company. But it was bid in 2006 on terms that many consider less than competitive, while the financing structure of Reliance Rail relies heavily on debt.

Reflecting the importance of the project to the company, Mr Fenn was told when he was appointed in August he would receive 100,000 shares if the first train was delivered by December 31. He managed to meet the December deadline.

He is still eligible for 200,000 shares in the company if he delivers trains two to five by the end of 2011.